Do wage rises push up prices?

by Anindya Bhattacharyya

Published Tue 24 Jun 2008

Issue No. 2107

Government ministers responded to news of rising inflation figures with a single message – it’s time to crack down on wage rises. Prices for food, fuel and other basics may be going through the roof, but that just means workers must “tighten their belts”.

The chancellor Alistair Darling warmed to this theme last week, declaring, “We cannot get ourselves into a position where we allow inflation to take hold because we get into inflationary pay rises.”

He repeated this message on Sunday, telling the BBC, “Pay awards in both the private and public sector have to be consistent with our inflation target, which is 2 percent.”

Darling’s call was echoed the next day by Andrew Sentance, a member of the Bank of England’s monetary policy committee, who warned of the need to ensure that wages “do not pick up in response to a temporary episode of rising headline inflation”.

Underlying all these calls for wage restraint is the theory of the “wage-price spiral”. The idea is that workers respond to rising prices by pushing for higher wages, and that companies respond to a higher wage bill by jacking up their prices.

According to this theory, inflation should be tackled by workers accepting lower pay rises and companies holding back on price increases. This discipline is buttressed by high-minded appeals to a “common good”.

Spiral

Thus Darling said that getting into an inflationary spiral would be “disastrous, not just for the country but for each and every one of us”. Sentance similarly warned that “wage and price increases” would fuel inflation.

But there are problems with this theory and its accompanying ideology of “we’re all in it together”.

For starters, whatever the rhetoric of “national unity”, wage levels are negotiated between workers and bosses, while price increases are not. That means that in practice, most of the burden of “restraint” falls upon wages, not on prices.

Pay restraint does not fall equally either. For the past two years Gordon Brown has insisted on a maximum 2 percent wage rise for public sector workers. But bonuses and salaries paid to City traders are as extravagant as ever.

Ultimately the “wage-price spiral” theory is based on a false equation. It treats the demands of ordinary working people for the basics in life – food, housing, clothing, fuel – as being on a par with the demands of big business for fat profit margins.

It treats profits as sacrosanct and presents the ruling class’s insatiable desire for profits as a fact of nature that everyone else must accommodate to.

That is why socialists should reject the argument that wage rises cause inflation, or that wage restraint can hold it back. The decision to raise prices is a conscious, political decision made by the bosses to protect their profits.

Inflation is ultimately built into the system of capitalists chasing profits. And workers should not pay for the chaos caused by their system.

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